Monday, February 28, 2011

A few years ago, before the demise of so many community banks in Georgia, I would have had a suitably long list for you. Now, with so many Georgia banks failing as a direct result of the meltdown in residential housing (they had too many loans to home builders in their portfolio), the list is much smaller. Many of the banks on the SBA's list of SBA-approved loan providers rarely fund 7a loans.

BB&T is an excellent regional bank that often acts like a community bank. I've worked with them in the past. They have a strong commercial lending department and respond quickly regarding loan status.

CIT Small Business Lending is an excellent source for 7a loans. They used to be the largest national SBA lender and the largest SBA lender in Georgia (in dollar amounts) but then they went through a bankruptcy. However, that bankruptcy was quick and well-organized. CIT exited in record time and is back to lending.

One Georgia Bank is a good small bank. They were formed in the last ten years but are doing well. They are a top SBA lender. I've seen the CEO speak at a few events. He's impressive.

SunTrust Bank funds a lot of 7a loans. Just remember it's easier with a large bank like SunTrust if you have a relationship with someone at the VP level or above. That will help you across the board but it is really crucial with a large bank.

Other good banks are RBC, First Chatham Bank (Savannah), and UPS Capital. Check the top 10 SBA loan rankings for Georgia (or your particular state) to see who the top SBA loan providers are for any given year. Be aware that this ranking also includes the SBA express loans which are significantly smaller than 7a loans. But you can use that list as a starting point. It's simple enough to contact the bank's SBA loan department and inquire as to how many of their SBA loans are 7a.

Be aware that some banks or loan officers will string you along for weeks not telling you they've rejected the loan. That's another reason for you to develop a good relationship with a senior level banker. The reason loan officers typically become unresponsive (i.e., not responding for three or more weeks) is the deal doesn't look good and they've been getting internal pushback or the deal will require a lot of additional support - guarantees, documentation, etc. - and they either have more pressing deals that are easier or they would just rather handle other duties than work on your deal. They haven't yet formally stamped your deal a "no".

If your banker has not responded in a week or two, don't get too concerned. If they're good, they probably have a number of deals they are working on, especially as the end of the quarter draws near. Bankers try to close loans by the end of the quarter to book the fees on that loan as revenue in the current quarter. If your deal just won't close by quarter end, you'll have to wait until their time frees up. This is normal.

If you dislike the responsiveness level and you think you have a good (or good enough) relationship with your banker, then pay them an unannounced visit. If he or she is not in, then just leave a nice note stating that you dropped by to get a status update, you know he or she is busy, and you'd appreciate just a 3-minute update. Otherwise, you should pursue a relationship with another loan officer at the same bank or with another bank altogether.

Friday, February 25, 2011

Are you (a business owner) personally liable in personal bankruptcy for business debts? This was a question I recently was asked and have been asked variations of the same question in the past. So I thought I'd share it with you in order to help others who may have similar questions.

Let's assume the following:

You are about to file PERSONAL bankruptcy (Chapter 13 - reorganization or Chapter 7 - liquidation) because either your personal debts are too large or you took on personal debt for the business. In either case your personal debt far outweighs your assets and your income.

Your company owes money and has been late on some payments.

Your company is an S-corp.

Question: My business owes other money and now I am scared that other creditors will go after me personally. Can they? Do I need to include the other business creditors in my personal bankruptcy filing? Do I have personal liability for my business' debts?

The reason for being incorporated is to shield you personally from the company's liabilities. To maintain this shield, you must conduct your business appropriately so as not to allow the "corporate veil" to be pierced. But that is only part of the question here.

Response:
The S-Corp. designation is for tax purposes. For legal purposes, the company is a C-corp. and is still a wholly separate entity from you. I won't go into detail as to what it means to maintain the corporate veil. Suffice it to say you need to maintain separate bank accounts, sign all company documents with your position, not just as your name (i.e., Tiffany Wright, president, Toca Family Business Services vs. Tiffany Wright), and keep corporate records of annual shareholders and directors' meetings. If you have not done this, you open yourself up to personal liability. (This opening up is what is called "piercing" the corporate veil.)

Now, if your personal financial situation is poor, you are filing for personal bankruptcy and you have NOT followed the above, you should DEFINITELY list any business creditor that you believe could have a legal right to come after you on your bankruptcy. But be careful. Chapter 13 is a restructuring, not a liquidation. So, if you are not sure, you could end up entering into a payment schedule to pay back business loans you never would have had to if you had not included them in your bankruptcy filing. If it is a Chapter 7 filing, go for it. You'll remove any threat of pursuit by business creditors now or in the future.

Here are some questions to ask?

Did I sign a personal guarantee on any of the loans?

Did I personally guarantee any repayments to suppliers?

Did I sign any documents with potential creditors just as myself or pay them with a personal check or personal credit card from my own personal account? (If you only did the latter, you MUST create a paper trail, if there isn't one already, where you either get reimbursed by the company, increase the loan amount to the company, or something similar.)

If you answered "yes" to these questions, you need to include those creditors in your personal bankruptcy filing. It is highly likely that you do have personal liability for your company's debts. If not, then do not include them, unless you STRONGLY believe your business record-keeping is abysmal and can't be corrected in sufficient time.

Another thing to note: In a personal bankruptcy, creditors come after your assets. So they can pursue your shares - i.e., your stock - in the company. They can't make you make poor decisions for the company that are in favor of your personal creditors but they can threaten to pursue ownership of your stock in the company. (Remember, your business is an asset and any asset you own except your retirement accounts, your house in some states, and a few other items, are fair game.) Be aware, in a personal bankruptcy a creditor cannot takeover your business, they can only ask the judge to include it in the determination of your net worth. If the judge does and deems the business valuable enough, then you may be compelled to sell your shares in the business to generate funds to pay the creditors back. This is very difficult to do with small businesses since there is NO ready market for the shares which makes the shares extremely difficult to value AND nearly impossible to sell. So this inclusion and compelling to sell rarely happens.

The only time I recommend paying attention to a threat of pursuit of your shares is if a business owner has been taking large cash distributions from the company for some time and thus has created somewhat of a personal paper trail documenting some of the value of the stock they hold in the business AND if there are other partners, co-investors, etc. who could let the bankruptcy court (or a creditor) know that they would gladly buy the owner's shares.

Tuesday, February 22, 2011

One new and growing source of microloans (those under $35,000 to $50,000) are peer-to-peer lending networks. Peer-to-peer lending, also sometimes called social lending, providers make direct loans (no 3rd party intermediary like at a bank) between consumers and investors possible. Put in other words, these entities connect those who have money to invest with those who need money. These official networks and companies did not even exist ten years ago. Social lending is just another example of how people and companies continue to engineer creative legitimate solutions for business financing.

Prosper.com (www.prosper.com) - Prosper is the industry juggernaut and lends to individuals and small businesses that typically have credit scores between 620 - 699. This company was founded five years ago (February 2006) and essentially hailed the advent of peer-to-peer lending. To date it has funded ~$219 million in loans. Prosper, as of December 2010, now sets the interest rates for loans. Previously potential investors bid on the rates. Available in most, but not all, states. Check website for details.

Lending Club (www.lendingclub.com) - Lending Club is the 2nd largest peer-to-peer lending site by volume in the U.S., behind Prosper, but the largest in terms of loans funded. It was founded ~three years ago. Lending Club sets the interest rate for all the loans and has done so since inception. Its tag line is "Investors earn better returns, borrowers pay lower rates." As of today, 2/22/11, Lending Club has funded ~$226 million in loans.

Loanio, (www.loanio.com) - Loanio is a little different. From Loanio's website,"all loans are originated by Loanio and then sold to website lenders who are legally considered the loan purchasers". So, essentially, Loanio originates and makes the loan, then sells the loan to the small individual investors through its website. Loanio is currently in a quiet period so it's not making loans or taking on new investors at this time. It will "re-open" for business as usual soon.
WikiLoan (www.wikiloan.com) - WikiLoan provides tools, documentation, and other support that enable friends and family to make loans to or obtain loans from one another. Borrowers can also access loans from the WikiLoan community. Loans range in size from $500 to $25,000.
LendingKarma (www.lendingkarma.com) - LendingKarma is different. It does NOT provide loans to or from strangers. It strictly facilitates loans between family and friends. Need a loan and your brother or accountant offers to give it to you? LendingKarma will help clarify loan terms, set up a repayment schedule, and track loan repayment.

A note: Some early entrants such as Zopa, Virgin Money, and Fynanz no longer operate in this market although they still exist as companies. Zopa and Virgin Money still lend in the U.K. and other countries but NOT in the US. Fynanz now only provides student loan assistance through credit unions and similar entities.

Friday, February 18, 2011

Continuing from earlier this week, another source is purchase order financing. The ‘financing” is a bit of a misnomer. No company that I know of actually lends against the purchase order. Never say never, but I’ve talked to representatives of over ten companies that purport to offer purchase order financing. When I delve down what they actually offer is a letter of credit or guarantee of payment. For example, you need to manufacture 1,000 items to fulfill the terms of a contract with a large, credit worthy entity such as a government agency or Fortune 1000 company. The purchase order financing company would guarantee payment upon delivery or within 30 days to the manufacturer, using your purchase order as the “collateral”. So the financing entity has essentially inserted itself as a high credit-worthy company in order to get terms. Otherwise, you’d have to pre-pay the manufacturer for the order. Consequently, although it’s not officially ‘financing’, purchase order financing serves a business financing need.

Another debt source for small businesses is equipment loans or lease providers. These are typically industry-specific equipment manufacturers or distributors. Why industry-specific? Because the equipment providers know the industry, market, pressures, issues, etc. that help them determine whether or not a potential customer is credit worthy or not. Third party equipment loan and lease providers often span several different industries. They broaden their understanding of the dynamics in various industries by employing people who may specialize in one or two industries. The others understand how to credit assess small and medium businesses and what the red flag items are. If your company’s credit profile is iffy, I recommend pursuing a 3rd party equipment financing provider that specializes in two or three industries. These will have the highest risk tolerance because they are highly adept at identifying and mitigating risks in that market sector.

Other options include personal, rental, or business property credit lines and business credit or charge cards. These are very self-explanatory so I will not go into them. My only comment on business credit and charge cards is to get them without a personal guarantee, if you can. If you cannot, then make sure that you obtain the business credit card in your company’s name AND under your company’s tax id number and check in every quarter to either reduce or remove the personal guarantee (i.e., any association with your social security number). You will need to build your business credit to do this. That includes obtaining store credit, such as Staple’s or Office Depot, Home Depot or Lowe’s, etc. in your company’s name and tax id.

The next time I’ll cover the last three options I intend to cover in this series on alternative debt sources: supplier/vendor financing, micro lenders, and peer-to-peer lending.

Thursday, February 17, 2011

This presentation is targeted at small businesses and start-ups. (The previous presentation was meant for businesses with ~$20 million in revenue and up.) The purpose is to introduce small business owners to the myriad options that exist for financing the growth, start-up, or acquisition of a company.

Tuesday, February 15, 2011

Beyond the traditional bank debt (term loan or line of credit), there are a number of alternative debt sources for small businesses. Typically small business owners think about credit lines and other loans that are guaranteed by their personal assets or by their signature when considering financing sources for their businesses. (Signature loans are more difficult to obtain in this somewhat restricted credit environment but they do exist.) However, numerous other options exist.

First, there are asset-based lenders. It is true that banks will lend against your receivables, but only if you have a track record of net income and cash flow (and receivables) that justifies the business credit line. For example, if you generate monthly account receivables of $100,000, have been doing so for 18 months, show a monthly profit of 8% or more, and have financial statements that show this, then your bank will lend you the money. However, if you recently garnered one or more new contracts and jumped from $60,000 per month in account receivables to $100,000, then the bank will only lend against the $60,000.What if your company does not have a profitable history of 12 months or more because it is new or you have had difficulty in the recent past? This is the space where receivables financing providers reside.

For small businesses with little or no history and minimal profit, factoring companies may be the answer. These entities purchase a company’s accounts receivables at a discount (typically 3-14%) and collect the payments directly from the company’s customers. Yes, factoring companies are expensive but for those starting out, recovering from losses, or in any number of similar situations, may be an excellent source of capital. The key is to only use factoring in the SHORT TERM. You must make a PLAN to move to cheaper sources of financing within the next 6-12 months, otherwise you could find yourself in a perpetual cycle of insufficient working capital due to high financing costs.

Another source of accounts receivable financing is accounts receivable credit line providers. These entities provide a line of credit against your accounts receivables. You collect from your customers and pay the loan provider. The receivables financing firm ensures they collect by placing a UCC lien against your accounts receivables. The typical range is 1% - 4% per month. The good thing about this type of financing is that more emphasis is placed on the credit worthiness of your client than on your company. So if you have a mid-sized or large company with a high credit rating as a customer, then your monthly interest rate will be lower.

Thursday, February 10, 2011

I am the incoming president/outgoing Treasurer for Team Ivy Breakfast Networking, Inc., a non-profit networking group in Atlanta, GA. Here is a program that we have coming up next week that those in the greater Georgia area may be interested in.

Kathy Harris is a Partner at Noro-Moseley Partners (“NMP”), the oldest and one of the largest venture capital firms in the Southeastern US. The firm has over $660 million under management through six funds and has invested in more than 170 companies. At NMP, Ms. Harris focuses on business development efforts throughout the Southeast and Texas. She also focuses on NMP’s investment activities in the healthcare industry and serves on the Board of Valor Healthcare, Inc. and as a Board observer on Senior Whole Health.

Ms. Harris has over 25 years of finance and investment experience. Prior to NMP, Ms. Harris was a Partner at Technology Ventures, an Atlanta-based venture capital firm where she evaluated investment opportunities in the information technology areas and actively worked with the firm’s portfolio companies. Prior to Technology Ventures, Ms. Harris served as Vice President/National Marketing Manager of Sirrom Capital Corporation, where she oversaw all business development and loan origination activities. Prior to Sirrom, Ms. Harris spent more than 10 years at J.C. Bradford & Co. (now UBS) where she was Senior Vice President of the Investment Banking Group. She was involved in more than 100 investment banking transactions totaling over $2 billion including equity, debt and convertible debenture public
offerings and private equity and debt placements. She was also involved in a number of merger and acquisition and financial advisory assignments.

Ms. Harris started her career at KPMG and is a CPA licensed in Tennessee (inactive). She holds an MBA in Finance and Human Resource Management from the Owen Graduate School of Management at Vanderbilt University. She received her BS in Accounting from Murray State University.

Wednesday, February 9, 2011

First, let me state that I am NOT an attorney. However, I've signed many, many contracts. I have written contracts (using past contracts as reference) and had an attorney review and edit them. I've also negotiated quite a few. Why am I saying all of this? Because I received the following question, which I subsequently answered: Will my small business contract would be voided if I did not follow the contract to the letter? For example, if my contract states that the client must pay upfront for service but instead, I wait and take payment from them after I finish the work? Does that void the contract? Here was my response:

You need to add language to your contract that states in essence "No portion of this contract is voided should section X or Y not be followed to the letter or any section or term be declared illegal or unenforceable." This clause or section is called Severability. Here's an actual excerpt from a legal document, courtesy of Entrepreneur.com:

"Or, If any provision of this agreement shall be declared by any court of competent jurisdiction to be illegal, void, or unenforceable, the other provisions shall not be affected but shall remain in full force and effect."

It's crucial to include this or a similar Severability clause. Otherwise, if you don't follow the contract EXACTLY as written in the contract OR if some term is deemed unenforceable, the entire contract could be voided exactly as you feared. If you include the Severability clause, the section where you reference payment arrangements or terms could be voided but the remainder of the contract would stand (i.e., be enforceable).

Wednesday, February 2, 2011

A friend from Insead forwarded me an email she received about a VC funding event. She inquired if Wharton alums could attend. One of the organizers replied that it was open to anyone. So I'm passing this information on to anyone who will or could be in the New York City area on February 15, 2011.

February's program will feature a distinguished lineup of early stage VCs who will share their criteria for funding deals in 2011 and their insights on where the venture industry is heading.

NEW - SPEED PITCHING!!We’re pleased to announce that this year’s program will also feature Face 2 Face “Speed Pitching” which will allow startups an opportunity to efficiently pitch, shake hands, and hand out their executive summaries.

If you are in the area and wish to attend and are one of the following: private investor, venture capitalist OR a founder or CEO of an early stage or rapid growth companyplease click here for more information and to register.

Tuesday, February 1, 2011

If you listen to the news reports and pundits, small businesses are having an extremely difficult time obtaining financing due to the mortgage industry’s adverse impact on the banking industry and the resulting tightening of credit.

“Lack of capital is not the real issue, although it is a much bigger issue than in 2007. Capital in 2009 is still available. The primary issue is lack of knowledge of and access to capital. The younger the entity, the fewer the sources,” says Tiffany Wright, author of the new book Help! I Need Money for My Business Now!!. “Most small and medium businesses are completely unaware of the variety of financing sources that exist for their business type or they are highly unprepared to meet the requirements from a relationship and financial packaging perspective.”

Wright contends that there are always several financing alternatives available for any small business. To access these entrepreneurs and business owners must educate themselves and think creatively. “Most business owners think of bank financing when you say debt and venture capital when you say equity. While these two sources provide a significant amount of small business funding, there is a vast pool of working capital for business and other ways to raise capital available from other entities. There are even providers of financing that looks a little like debt and a little like equity.”

Help! I Need Money for My Business Now!!:How to Access Traditional and Creative Financing for Your Business has over 25 in-depth yet succinct case study examples of what other real business owners have done to raise capital to grow their businesses. The material covers not just what is available but the how to obtain it - what works best and why for your particular business type, templates, websites. It includes everything from pursuing business-friendly community banks to forming strategic alliances to tapping supplier financing. This ebook manual shows business owners how to raise the capital they need to survive the economic downturn and grow their business. Help! I Need Money for My Business Now!! helps business owners lay the financial framework to create a viable, sustainable business to sell or pass on.

According to the U.S. Census Bureau, as of 2004, there were nearly 5.9 Million firms with employees in the US and 19.5 Million firms with no employees. 2.8 Million firms had 1-4 employees and another 1.0 Million firms had 5-9 employees. Only 86, 538 companies had 100 or more employees and only 17,047 of those had 500 or more employees. Thus the impact of small businesses on the economy is huge. Wright says, “We must help more small businesses grow into larger, financially stable and viable firms. This way we ensure the return to health of the American economy.”